| |
ROLLS-ROYCE Group Plc, the world's second-biggest maker of airliner engines, may be a more compelling investment than General Electric Co or United Technologies Corp as the threat of recession shadows the aircraft industry.
More than half of Rolls-Royce's revenue comes from long-term maintenance contracts, cushioning it against any global slowdown in plane sales, according to Bloomberg News. The company's larger competitors also depend on consumer products such as light bulbs at GE and air conditioners at United Technologies.
"The aftermarket is very much where you want to be, that's where you make the money," said Heather Tomkinson, an analyst at Tilney, the United Kingdom branch of Deutsche Bank Private Wealth Management.
The London-based company's success in boosting sales in Asia and the Middle East, where economies and plane sales are strongest, added to the stock's allure, she added.
Orders from the two regions more than doubled to 20 billion pounds (US$39.71 billion) in the 12 months through January, accounting for 43 percent of Rolls-Royce's total.
Connecticut-based General Electric, the world's biggest engine maker, and United Technologies depend on the United States for about half of revenue, compared with 30 percent at Rolls-Royce.
Holding its own
The UK company's stock plunged 10 percent on February 7 after Rolls dashed expectations it would announce a stock buyback.
The shares have dropped 22 percent this year to 418.25 pence.
"It's obviously getting caught up in worries about the commercial aerospace business and that's despite the huge order intake," Tomkinson said. "Rolls-Royce has shown in the first quarter alone that it's holding its own."
The company has orders from Cathay Pacific Airways Ltd, Royal Brunei Airlines and Oman Air. The deals include aftermarket contracts. Rolls-Royce breaks even on engine sales and earns a profit margin of about 22 percent on maintenance, said Clive Forestier-Walker of Numis Securities Ltd in London.
The shares may rise 20 percent to 500 pence as investors recognize Rolls-Royce has increased the proportion of repair work to 55 percent of sales from 40 percent in 2001, said Zafar Khan, an analyst at SG Securities in London.
Service contracts make Rolls "more resilient in any potential downturn," he said.
Enormous backlog
The company won orders valued at US$14.7 billion in the first quarter, compared with US$903 million a year earlier, it said. Contracts include supplying engines to US Airways Group Inc and Thai Airways International Pcl.
"The order book is still growing nicely; the backlog is enormous," said Forestier-Walker. "The driver for profit, the installed engine base, is getting larger all the time."
Including new orders since January 1, Rolls-Royce's civilian aerospace unit has a backlog of at least 40 billion pounds, he said.
Seventy percent of new orders are covered by TotalCare, in which the company charges airlines a fee, based on hours flown, to service engines. Under the contracts, which usually run 10 to 15 years, Rolls-Royce fixes or replaces engines as needed. GE and United Technologies offer similar programs.
Rolls-Royce's reliance on the US dropped to 30 percent of total sales in 2007 from 36.5 percent in 2005. GE's aviation unit gets 48 percent of revenue from the country. United Technologies got 48 percent of sales from the US last year.
To bolster profit, Rolls-Royce is cutting 2,300 jobs, 6 percent of its workforce, in Europe and the US.
"We're going to continue to focus strongly on productivity improvements," said Rolls-Royce Chief Executive Officer John Rose.
|